Dividend Yield

Dividend Yield

The dividend yield is the easiest of the measures to calculate, and it is typically provided to you as part of a stock quote by sites like Yahoo Finance or MSN money. First I’ll explain what dividend yield is and then I will explain (and show) how to calculate it.

Definition

The definition of dividend yield provided by Investopedia is “A financial ratio that indicates how much a company pays out in dividends each year relative to its share price. ” If were an inexperienced investor, even this definition for what should be a simple concept would be enough to scare me. It’s amazing how finance people try to make everything seem more complicated than it really is. If they can find a way to use a 14 letter word instead of a 5 letter word, they will!

Calculation

What the above definition is saying is the dividend yield can be calculated by dividing the annual dividend per share by the share price. I will use one of my favorite stocks Apple Inc (AAPL) as an example. As of the close of business on Friday May 12, 2017, AAPL traded at $156.07 dollars per share. It pays out $2.52 per share in dividends per year. That means the dividend yield can be calculated as follows:

2.52/156.07 = 0.016147
0.016147 * 100 = 1.6147%

The reason we multiply the number by 100 is because percent literally means per 100 so the value we get has to be multiplied by 100 to get the whole amount, otherwise we just get 1%.

Using dividend yield in decision making

So now you may thinking “it’s great I know how to calculate dividend yield, but how do I use it?” When investing in dividend stocks, you can’t simply use the total amount of dividends paid because a stock with a higher price could have a higher payout but actually a lower percentage, this means you are getting less dividend back for the money you spend. As an example, I will compare Ford (F) and Apple (AAPL). Both of these values are as of the close of business on May 12, 2017 and the percentages are calculated using the above formula.

AAPL stock price = 156.07
AAPL dividend payout = 2.52
AAPL dividend yield = 1.6147%

F stock price = 10.93
F dividend payout = .60
F dividend yield = 5.4895%

By only looking at the yearly payouts, Apple looks much better than Ford, but surprise, Ford actually pays a higher percentage than Apple. This means that if you spent the same amount of money on both Ford and Apple stock, Ford would actually pay you more. Go ahead try it for yourself!

The dividend yield is a great tool for doing a quick comparison, but this is far from the only tool we will use in our analysis, since even bad companies can have a high dividend yield. The next post will look at dividend growth, so check back often, and as always feel free to email me or post a comment with any questions or suggestions you have.

Dividend Decision Formulas

Dividend Analysis Tools

Present Value Factors

When making a decision on whether or not to buy a particular stock, there are several present factors you need to consider, including:

Dividend yield
Dividend growth
Dividend payout ratio
Free Cash Flow
Free Cash Flow

Future Value Factors

There are also some future factors to consider, such as:
Interest Coverage Ratio
Net Debt to Equity Ratio
Forecasted Earnings per share growth

I realize this is a lot to take in, so I will spend the next several weeks covering each topic one by one until we have went through them all (complete with examples). The first topic I cover will be the dividend yield.

Getting Money to Invest

So you might be thinking, “this advice on investing is great, but I don’t have enough money, and investing is expensive.” That’s the subject of this post. Yes, I agree, investing takes money, and if you are like me, you don’t want to sell your TV, computer, or auction off your first born on eBay. This is the kind of advice you will get from a lot of investment people, but relax, I’m going to give you less painful ideas, that will still allow you to watch your Sunday afternoon football games or cooking shows.

Side job

The first thing you can do is find a side business to earn extra income. Find something you enjoy doing and figure out away to turn it into paying hobby. For example, suppose you are very technical and like fixing things. You could do something like buy old cellphones, fix them, and resell them at a profit. Maybe you aren’t technical, but you like writing, you could find a job doing editing or writing content for web sites.

Surveys

So you are thinking this is great, but I already work a full time job and I would like to spend what little free time my employer gives me with my family. Well, I have ideas for you too. If you are just sitting around watching TV, relaxing like a lot of people do on the weekend, you could take online surveys to generate money. There are various companies that have surveys of different lengths that pay different amounts (usually based on length). You could use something like Swagbucks.

Cut back on spending

If you are like me and you want to use your down time as down time, your options are more limited, but there are still ideas for you as well, so fear not. The other way to earn money is simply to spend less. You could check out apps like the Walmart savings catcher, that give you cash back, when you buy things that are priced lower at another store.

One big thing that I know affects me and my budget in a big way is eating out. If my wife and I go to an Italian restaurant, I can expect to pay between $7 and $10 for an entree. Now I if I made this exact same dish at home, it would cost roughly half that per meal. Over time $3 or $5 will add up, especially if you do this two or three nights a week. Supposing you eat out like this for 3 nights a week, by eliminating this you will have an extra $12 to $20 per month.

Another idea on this line is to buy generic products, now I’m not talking about medicine or anything like that. Just instead of paying $5 for a single bottle of Listerine, you could get the Walmart twin pack that cost $5 for two bottles. That also leads me to my next idea, buy in bulk. Typically, the larger quantity of something you buy, the cheaper it is per unit. This won’t gain you a lot of money right away, but over time the savings can be significant. But this is ok, because we are patient and investing is a long-term activity, right?

For other ideas, on how to cut back on spending and maybe even get your finances under control, I encourage you to check out Amy Beardsley’s blog at marvelousmrs. It’s geared toward working women with a minimal amount of free time, so if you fall under this description, it’s perfect. If you are a single guy sitting in an apartment, thinking well that doesn’t apply to me (not judging all you single guys, I was there too!), it’s perfect for you as well, as her advice can be applied to anyone looking to get their finances under control and have extra money (to invest of course).

Books

For those of you who want to read more on personal finance, here are links to some books.

Why Didn’t They Teach Me This In School?

Personal Finance For Dummies

Simple Money: A No-Nonsense Guide to Personal Investing

The Millionaire Next Door: The Surprising Secrets of America’s Wealthy

I would love to hear about any ideas all of you have to either save or earn money that you can use to invest. So please leave a comment or send me an email with all of your ideas.

Why Invest In Dividend Paying Stocks?

So you may be wondering why you would want to invest in dividend paying stocks rather than non-dividend paying stocks, or even what the differences are. Well, this post will answer some of those questions. First, I will briefly discuss non-dividend paying stocks.

The reason to hold non-dividend paying stocks is simple, you want them to go up in price so you can sell them for more than what you paid for them(including broker fees). You may have heard the saying “buy low, sell high”, this principle is what that saying refers to.

This strategy also applies to dividend paying stocks, but dividend paying stocks have a built-in advantage, as you will see shortly. There are several reasons to look for dividend paying stocks, I will discuss some of them below.

Income
The first (most important) and the reason you are likely reading and hopefully subscribing to this blog is income. Dividend paying stocks provide a regular, predictable income, usually quarterly (every 3 months), or in some cases monthly. This is a very nice feature for anyone on a fixed income, who does not want to, or is not able to work. Really who doesn’t like getting paid just for owning something? I mean how often has someone paid you for owning your house or car. I’m guessing not very often.

Growth
A side benefit of paying a dividend is companies that do so tend to see their stocks increase in value faster and more often than similar companies that do not pay a dividend. Also, they tend to perform better (lose less value) in tough economic times. This is important because as I mentioned earlier, the goal of investing is to buy low and sell high. People are willing to pay more for stocks that pay a regular divided as they are guaranteed regular periodic payments.

One-two punch
If you are lucky enough to find dividend paying stocks early enough or just after bad news, you might be able to take advantage of both of these situations. This would allow you to get paid twice, as you would make money off the dividends while you own the stock and you would also earn a profit when you sold the stock. Talk about having the best of both worlds!

These are the stocks we will be looking for, ones that pay a regular, high dividend, but also may have fallen on hard times and are prime for a rebound or one of many other conditions that would lead to a price increase as well as a safe high dividend. However, we will not sell them right away, since our goal is to increase our monthly income, not make a one-time profit. With that being said, we will typically only sell our dividend paying stocks if we learn the dividend is being cut, or eliminated.

What are some reasons you are looking to invest? What are your goals for investing? Let me know by commenting on this post or by sending me an email at justin@divinvestor.com.

Welcome to DivInvestor.com

My plan is to follow William Makepeace Thackeray’s famous proverb, “Give a man a fish, he’ll eat for a day; teach him how to fish, and he’ll eat for a lifetime.” I plan to share tools and advice on how to research and select safe, high yielding dividend stocks or other income investments, as well as track them and know when to buy and sell (yes I said sell, since there will be times we want to get out of an investment). After all there are a lot of “fish” in the sea of stocks choices and not all (most) are not very good or will not further our goals.

I am choosing this option rather than simply following the lead of so many other books, blogs, and pundits and providing “tips”, because only you know your situation and which investments fit your lifestyle and goals. By providing tools, you have control over your own destiny! I welcome any comments and will try to answer all questions. With that being said, welcome and happy fishing!